Forex market is the largest market; in terms of other financial markets and trading volume. It consists of trading more than $5 trillion just in a single day. In the forex market, currencies are quoted in a pair and one currency value against the other. No single currency pair trades completely independent of other pairs. In the currency market, some currency pairs are highly correlated and some currency pairs are comparably low correlated. Correlation of currency pairs is further classified into two main correlations: Positive correlation and Negative correlation. Two currency pairs which move in tandem is known as positive correlation while negative correlation is opposite to positive correlation. Traders avoid trading on the currency pairs which have more volatility.
So, what forex pairs move the most? AUD/JPY, AUD/GBP, CAD/JPY, and NZD/JPY. These are the forex currency pairs which move the most/volatile pairs. All the currency pairs in the forex market move but, these five currency pairs move the most and they are unstable.
A forex trader must take care of changes in the currency in which he is trading and other positive and negative correlated pairs because it helps in risk management. Correlated currency pairs, no matter it is positively correlated or negatively correlated, give him an idea of in which direction he should trade and which direction to avoid trading. A forex trader should focus on the forex currency pair which has potential of trading opportunities. It is better to choose a least volatile currency pair instead of high volatile currency pair.
Measuring volatility of your currency pair is very crucial; it lets you know the market condition. There are various ways available to measure volatility.
Ways to Measure Volatility
Measuring volatility helps you in determining the current position. Here are some indicators that can be used to measure volatility:
- Average True Range (ATR)
- Moving Averages
- Donchian channels
1. Average True Range (ATR)
This indicator is developed by J. Welles Wilder, to measure the volatility of currency price changes. Nowadays, the Average True Range or ATR is widely used by forex traders.
2. Moving Averages
There are four basic of Moving Average:
- Simple MA
- Exponential MA
- Linearly weighted MA
- Smoothened MA
Moving average indicator helps in determining the trend direction, uptrend or downtrend, the possible reversals and also helps in determining the flat market, when the price is neither increasing nor decreasing.
3. Donchian channels
It is a technical indicator which helps in measuring the relative volatility of a financial instrument, developed by Richard Donchian. Donchian channels are applicable in almost all financial products, whether it is futures, equities or the currency market.
So, these are the three ways to measure volatility. As a forex trader, you should be aware of volatility and know about ways to measure currency price volatility.
Some key factors you should know about Volatility
There are different factors in the market which affects the volatility. Here are some important things you should know as a trader about volatility:
- Volatile pairs of currencies still follow technical aspects of trading, like trendlines, price patterns, support and resistance levels etc.
- You need to stay up to date with the latest news of forex pair analysis and price, which can help you in analyzing the market more carefully.
- Data release can also affect volatility.
- Technical analysis can help a trader in volatility.
So, these are some key factors a trader should know about volatility. Also, big news events like, Trade wars and Brexit have big impacts on currency volatility.
When a trader places a trade, he speculates on the currency which he believes it would be stronger or weaker against the other one, hence, achieves the goal and make his profit.
Types of Forex Currency Pairs
The main types of forex currency pairs are divided into three: Major currency pairs, Minor currency pairs, and Exotic currency pairs.
1. Major Currency Pairs
The currency pairs which are most frequently traded, globally, are known as major currency pairs. Major currency pairs have massive liquidity and they have the lowest spreads. Here is the list of some major currency pairs:
- EUR/USD (Euro/US Dollar)
- USD/JPY (US Dollar/Japanese Yen)
- GBP/USD (British Pound/US Dollar)
- USD/CHF (US Dollar/Swiss Franc)
- USD/CAD (US Dollar/Canadian Dollar)
- AUD/USD (Australian Dollar/US Dollar)
- NZD/USD (New Zealand Dollar/US Dollar)
So, here are major currency pairs, we can notice that every major currency pair has US Dollar on one side because US Dollar is the world’s leading reserve currency and it is involved in around 88% of foreign exchange trades.
2. Minor Currency Pairs or Cross-currency Pairs
Minor or cross currency pairs are those which does not contain the United State’s Dollar, which is the world’s leading reserve currency. Earlier, if wanted to convert any currency, first we have to convert that currency into US Dollars. But, with the introduction of currency crosses, there is no requirement to do that tedious calculation as brokers nowadays offer direct exchange rates. The three active currency crosses are the Euro, the Yen, and the UK Pound. Here is the list of some minor currency pairs or cross-currency pairs:
- EUR/GBP (Euro/British Pound)
- EUR/CHF (Euro/Swiss Franc)
- EUR/CAD (Euro/Canadian Dollar)
- GBP/JPY (British Pound/Japanese Yen)
- CHF/JPY (Swiss Franc/Japanese Yen)
- CAD/JPY (Canadian Dollar/Japanese Yen)
- GBP/CHF (British Pound/Swiss Franc)
- GBP/CAD (British Pound/Canadian Dollar)
- GBP/AUD (British Pound/Australian Dollar)
So, here are some minor currency pairs or cross-currency pairs listed above. Minor currency pairs are those which does not contain the US Dollar, here, we can see above mentioned, no pair consists of US Dollar. The most widely traded pair of currency include Euro, Japanese Yen or British Pound.
3. Exotic Currency Pair
Exotic currency pair consists of a strong currency but smaller economy from a global perspective, the pair includes currency from major currency and from a developing economy currency. Generally, spreads can be higher in the exotic currency pairs. Here is the list of some exotic currency pairs:
- EUR/TRY (Euro/Turkish Lira)
- USD/SEK (US Dollar/Swedish Krona)
- USD/NOK (US Dollar/Norwegian Krone)
- USD/DKK (US Dollar/Danish Krone)
- AUD/MSN (Australian Dollar/Mexican Peso)
- USD/ZAR (US Dollar/South African Rand)
- USD/HKD (US Dollar/Hong Kong Dollar)
- NZD/SGD (New Zealand Dollar/Singapore Dollar)
So, here is some exotic currency pairs listed above. Exotic currency pairs have higher spreads while trading them; you won’t find exotic currency pairs often.
So, foreign exchange is the unregulated market, a trader must be aware of market conditions and be ready for upcoming changes and challenges in the forex market. Knowing a bit about forex currencies and pairs in the forex market could benefit a trader.
So, some forex pairs that move the most are AUD/JPY, AUD/GBP, CAD/JPY, and NZD/JPY. Some forex pairs that are traded the most are, EUR/USD, USD/JPY, GBP/USD, USD/CHF, USD/CAD, AUD/USD, NZD/USD, these forex pairs constitute the largest share of the forex market, around 85% and hence, they consist of high market liquidity. A trader should focus on the forex currency pairs that move the most and analyze that currency pair, such currency pairs cannot be predicted easily they change at any period of time. Hence, it is better to trade with the forex currency pair that has a good trading opportunity.